The Little Guys Win One on Payday Loans

Since the federal Consumer Financial Protection Bureau opened its doors in 2011, the agency’s investigations and enforcement actions have returned more than $12 billion to auto buyers, homeowners, credit-card holders and other borrowers who were victimized by deceptive or predatory practices. Consumers who have been trapped in debt by the notorious payday lending industry will now get extra help from the bureau with a rule imposed this month.

These lenders advertise as “easy” the short-term loans that come due in two weeks. The borrower typically writes a postdated check for the full balance — including fees — or allows the lender to electronically debit funds from his or her checking account. The borrowers often take out another loan to pay off the first, falling to a cycle of increasing debt.

The bureau found in a 2014 study of about 12 million payday loans that only 15 percent of borrowers could repay the total debt without borrowing again within two weeks. Nearly two-thirds of borrowers renewed the loans — some more than 10 times — paying heavy fees that further eroded their financial standing. Strikingly, the bureau found that most people pay more in fees than they originally borrowed.

The new rule limits how often and how much customers can borrower. And lenders must take the common-sense underwriting approach, determining whether the borrower can pay the total loan and still meet living expenses.

Borrowers can take out one short-term loan of up to $500 without that test, as long as it is structured so that they are not automatically trapped into borrowing again. The rule also limits the number of times the lender can debit the borrower’s account, so borrowers can contest erroneous withdrawals.

The bureau is barred by statute from setting interest rates. But the new regulation makes clear that state usury laws — already on the books in 15 states — offer the most effective route to ending debt-trap exploitation. The one weakness of the new regulation is that it is immensely complicated, which means that the industry will inevitably find loopholes to exploit.

The payday industry is predictably crying wolf, arguing that the new restrictions will dry up credit in some areas. In truth, payday loans will continue at lower profit margins — stripped of the debt trap. Beyond that, small banks and credit unions are beginning to realize that they can make money in the small-loan business without predatory tactics.

Payday industry leaders are urging Congress to overturn the rule through the Congressional Review Act, which lets lawmakers nullify regulations within 60 legislative days. But vulnerable lawmakers will be hesitant to vote for predatory lending tactics that drive people into poverty.

The Trump administration could undermine the regulations after the bureau’s director, Richard Cordray, leaves office or when his term expires next summer. Consumer advocates need to remain vigilant against that possibility.

A version of this article appears in print on , on Page A22 of the New York edition with the headline: The Little Guys Win One on Payday Loans. Order Reprints | Today’s Paper | Subscribe